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Gang of Eleven’s Tax Reform Plan is Wrong for Maine

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The sponsors of LD 1496 (pdf) have deemed themselves the Gang of Eleven. Unfortunately, for Maine’s taxpayers, the Gang of Eleven is an apt name because their tax plan amounts to nothing more than highway robbery. While we don’t have official numbers yet, the plan is estimated to raise approximately $150 to $200 million in new revenue from Maine’s beleaguered taxpayers.

Key features of the tax plan include:

1) Lower the personal income tax rate to a flat 4 percent and eliminate all deductions (home mortgage, charitable, etc.)

2) Increase the sales tax rate to 6 percent and expand the sales tax base to all goods and service–except for education and healthcare.

3) Reduce the top corporate income tax rate to 7.5 percent.

4) Increase excise taxes–cigarette tax to $3.50 per pack and beer and wine taxes will be doubled.

5) Eliminate the estate tax.

6) Create a $50,000 homestead property tax exemption.

Proponents of this tax plan argue that it won’t be a tax increase on Mainers because the plan shifts the tax burden onto tourists and out-of-state property owners a process called “tax exporting”. This sounds good in theory, but at the end of the day no one knows for sure if that tax burden is truly being shifted out-of-state.

However, even if some tax exporting occurs, it will likely be entirely offset by Mainers cross-border shopping in New Hampshire. Currently, I have estimated that Maine loses up to $2.2 billion annually in retail sales to New Hampshire (pdf). Increasing the sales tax rate, expanding the sales tax base, and higher excise taxes will send Mainers in droves over the border–perhaps the plan should be renamed “The New Hampshire Retail Development Act.”

Overall, this points to the fundamental problem of this tax reform plan–there is no such thing as a good, big tax. Simply shifting the problems with the income tax onto the sales tax only creates new problems. The long-term solution is that Maine needs spending reform before tax reform.

Governor LePage’s recent historic tax cuts are the perfect example of how spending reform must precede tax reform. Governor LePage began the process of right-sizing Maine’s state government, such as much needed pension reform, using part of the savings to reduce and reform Maine’s personal income tax through higher exemptions, a flattened tax rate structure, and a lower top tax rate of 7.95 percent, down from 8.5 percent.

What Maine really needs is a law that would prevent any new tax shifting proposal until Maine’s tax burden falls to at least the national average. Such a law would prevent legislators from wasting time on frivolous tax reform packages that simply rearrange the deck chairs on the Titanic (though this plan would be worse by punching new holes in the hull thanks to it being a tax increase). Legislators should only concern themselves with right-sizing a state government that currently exceeds Mainers ability to pay.